A Complete Guide to How the NUA Process Works
An asset passed down to you through inheritance presents an opportunity to do something remarkable: eliminate your taxable estate.
A non-taxable asset works much like a tax-exempt asset because it doesn’t subject your estate to inheritance tax when you pass on. The investment must go through the NUA process to be deemed non-taxable.
So, what is NUA, and how does the NUA process work? Below is a complete guide to get you starrted on the works.
What is Net Unrealized Appreciation
Net unrealized appreciation (NUA) is the difference between the cost basis and the current market value of a security held in a taxable account. When an investor sells securities at a profit, the NUA is the portion of the gain taxed at the lower long-term capital gains tax rate rather than, the higher ordinary income tax rate.
The key to understanding the NUA process is that it applies only to securities held in a taxable account. That means deposits held in a 401(k) or traditional IRA cannot be moved into a taxable account and sold later to take advantage of the lower tax rate.
Who is Eligible for NUA
To be eligible for NUA treatment, the investment must be a “qualifying security” held in a “qualified retirement plan.” Qualifying securities include stock in a C corporation (not an S corporation or LLC), mutual fund shares, and specific partnership interests. Common stocks that are not C-corporation stock, real estate, and cryptocurrency do not qualify.
There are a few fundamental rules to remember when it comes to NUA. First, you can only roll over the NUA amount—not the entire account balance.
Next, you must take a lump-sum distribution of the NUA; you cannot leave it in the plan or take periodic distributions. Once you receive the NUA, you cannot put it back into the plan.
When is NUA Most Attractive
NUA is most attractive when the difference between the cost basis and current market value is significant and when the owner is in a high tax bracket. NUA can be an excellent way to minimize taxes on gains when you invest in stocks. Still, it’s essential to consult with a tax advisor to see if it makes sense in your situation.
Proper NUA Execution
You’ll need to request an NUA from your current custodian. Once you have the NUA in hand, you’ll need to complete a tax form called a 1099-R. You will use this form to calculate the tax on your NUA distribution.
Once the form is completed, you’ll need to fund your NUA account with the appropriate cash or securities. You’ll then need to complete the NUA transaction by selling the securities in your account and transferring the proceeds to your NUA account. Be sure to consult with your financial advisor to ensure you’re making the best decisions for your unique situation.
Maximize the Profits from Your Investments
NUA can be a great way to receive a lump-sum payout for your life insurance policy. However, working with an insurance expert is essential to ensure you understand the process and options available to you.
Get in touch with an expert today to learn more about how we can help you with NUA.
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